China to Press Ahead With FX Reserves Diversification

CNBC

Thursday, 28 Jul 2011 | 6:27 AM ET

China will press ahead with diversification of its $3.2 trillion in foreign exchange reserves, and does not pursue large-scale currency holdings, the State Administration of Foreign Exchange said on Thursday.

"We will continue to diversify the asset allocation of our reserve assets and continue to optimise the holdings based on market conditions," the foreign exchange regulator said in a statement, responding to questions from the public.

The SAFE said the rapid build-up of China's reserves, the world's largest that swelled by $152.8 billion in the second quarter, was "not a direct" cause of inflation, which hit a three-year high of 6.4 percent in June.

The central bank has been using various tools, including the rise in banks' reserve requirement ratios and open market operations to sterilise capital inflows, it added.

"We don't purse large-scale reserves and don't pursue long-term surplus in international balance of payments," the SAFE said in a statement. It added that China needs sufficient reserves to maintain its debt repayment ability to fend off risks and safeguard the country's financial safety.

But as a long-term goal, the country needs to adjust its economic structure and change its economic model, which will "fundamentally" ease capital inflows, the SAFE said.

It seeks to answer some public question about the reserves.

Chinese officials have long pledged to diversify the huge reserves — as much as 70 percent o which are now in U.S. dollar assets, according to analyst estimates — but the process has been gradual.   

Xia Bin, an adviser to the central bank, told Reuters earlier this month that China should speed up reserve diversification away from dollars to hedge against risks of the U.S. currency's possible long-term decline. 

The SAFE pledged to make its reserve investment more transparent but it cautioned against giving too much information to international speculators trying to profit from any changes in China's reserves holdings.

The SAFE also pledged to widen the channel for capital outflows and take gradual steps to make the yuan convertible on the capital account.

Chinese Officials ‘Appalled’ by Impasse on Raising Debt Ceiling

Bloomberg

Jul 28, 2011 9:51 PM GMT+1200

Senior Chinese officials are “appalled” by the impasse among U.S. politicians on raising the nation’s debt ceiling to avoid a default, said Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd.

“Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw” for China, New York-based Roach, 65, said in an e- mailed note today. He said his assessment was based on visits to Beijing, Shanghai, Chongqing and Hong Kong.

For article GO HERE